The T3 Tax

I try to stay away from policy discussions here (although others sneak it in), but this suggestion by Ross McKitrick is so ingenious that I’ll relax my policy for a while. Ross proposes a carbon tax linked to tropical troposphere temperatures – the fingerprint of the CO2 contribution to warming. If models are wrong and solar or something else is causing climate change, then it would have negligible impact. If models are right, then the tax would go up a lot. It’s an elegant idea. Calling everyone’s bluff.

Read here.
Of course, it wouldn’t generate any commissions for lobbyists and brokers or expense accounts in night clubs in Moscow and Montreal; so it’s chances of passage are negligible. But isn’t it a better idea than anything on the field so far?

101 Comments

I was just about to post a link to Ross’ piece. As you say, it’s very elegant assuming the underlying premise is correct.

Is the tropical tropospheric warming truly a unique fingerprint of AGW? If so, then Ross has identified an excellent path forward. One can quibble about details; should the tax necessarily be revenue-neutral, is 20x the correct starting point, should it be indexed to inflation and if so which measure, what penalties should be imposed on countries which do not implement it, should developing nations be included, etc. But the foundation is exactly correct; directly tax the source of the problem, vary the tax based on severity, and let the market develop ways to avoid paying it (ie reduce emissions).

I agree with Ken, its the acceptance of the “fingerprint” which is most problematic here. If there is a downwards trend then there will be complaints about whether the troposphere temperatures are the best way of measuring AGW. However, it is an elegant idea which deserves to be considered.

This is a proposal that would have made Milton Friedman proud and a brilliant thought experiment, but as McKitrick says in the article:

Policymaking in the real world is messy, and ideas that sound good in theory can come out hopelessly gummed up with extraneous provisions that dilute or contradict the original purpose. But as a thought experiment, I find the T3 tax clarifies a lot of issues.

and I would agree. It is a better alternative to any mitigation plans I have heard and would be something to propose when one wants to determine how much the AGW advocates really want to attack the real problem and how much they merely want to impose regulations. The key here being keeping it revenue neutral — unfortunately that is where the gumming up would first occur.

It will never fly – for the simple reason that climate modellers would have competition in climate forecasting, unwelcome scrutiny into their models and methodology and, if they’re wrong, financial and professional repercussions that they will have to face up to.

Lets face it, the world of the climate modeller is an easy one: produce forecast, discard all contrary modelling runs, travel to lots of nice destinations for conferences, decry all skeptics as tools of capitalism, hobnob with political leaders, apply for funding for next even-more-mega-expensive computer system, lather, rinse and repeat.

They’ve got the field to themselves and they’ll never be willing to accept competition in their key markets from private enterprise which is by definition evil. The great advantage of climate modelling is power and authority without having any skin in the game.

Finally, real-world customers needing real-world analyses and the latter having real-world consequences. There is nothing like a customer paying real money for a software product and the results of its applications having significant financial impact to focus a modelers mind.

If the surface is warming at a rate faster than the tropical troposphere, would this be an “fingerprint” of non-CO2 induced warming? So what would be the fingerprint of other sources of warming? Shouldn’t we be looking for those as well?

#11: policy advocates are only talking about trying to stop GHG-induced global warming, not local climate change due to land-use modification etc. It’s worth trying to measure the other effects, but the T3 proposal is narrowly focused on the GHG aspect, since that’s what all the policy discussions (eg Kyoto etc) are about.

This would be conceding that world-wide climate is at it’s optimal and we can voluntarily turn control of one of the elements of life over to some politicians that have nothing but altruism in their hearts. Anyone want to buy a bridge?

Say in the future in is shown empirically that CO2 is only a bit player and temperature happens to continue rising due to other natural factors. Does anyone really think the tax is going to be adjusted downward after the politicians have become addicted to the income?

On the other hand if temperature drops, do you really think you’ll get a commensurate rebate for putting additional CO2 into the atmosphere? That will be a cold day in hell.

In my reality, once the politicians get their mitts on your money only an insignificant fraction ever gets returned to the citizens.

I assume that this would be a consumption tax based on carbon. And that as the revenue from from this tax went up, other taxes on both income and consumption would be reduced. It would be revenue-neutral.

So it would be like a Carbon-Added Tax similar to a VAT or GST that will be passed on to the final consumer? Is that correct?

RE: #13- That’s why the revenue stream from this should be mandated to be dedicated to manned space exploration (colonization) and defense, instead of entitlement programs. That way, there is a benefit to comprehensive strength and future economic expansion / resource discovery. It’s high time to get back into an anticipatory rather than anxiety driven view of the future.

Let me see: State Lottery goes to education, gas tax goes to highways, Social Security tax goes to social security, etc., etc. It is Pandora’s Box. Let’s tax cell phones (more) because they “might” be bad for us, and we will base the tax amount on a “brain tumor” fingerprint.

It is a great idea Ross. If Carbon really does increase temperatures at the rate advanced by global warming theory, then there really should be a significant “price” attached to releasing it into the atmosphere.

If economics has taught us anything, it is that price signals influence human behavior far more efficiently and far more effectively than any government program, environmental guilt or Hansenian proposition ever could. And that price signal will be far more efficient and effective the more it reflects the actual harm that Carbon causes rather than is surmised to cause.

I also fully appreciate all the subtleties of your proposal including the calling the bluff of the environmental movement, asking people to put their money where their mouth is and when the real money people finally get involved in the question with real money, the real facts will finally come to the forefront.

There is no solution to the overall problem that I have heard which would work as good as this proposal. Maybe others are right that it will go absolutely nowhere. But all the other proposals are already going absolutely nowhere 100 times faster.

I don’t mind using price signals to influence behavior, but why should we reward the government? The company being taxed was following the law. It was the government that wasn’t doing its job.

Ideally, one should be against releasing anything into the environment that could eventually put it out of balance (i.e. if you release CO2, you should also release 78% N2 and 21% O2 to your 0.03% CO2). This just seems like common sense. I am all for working towards this goal. That said, we all know that “Global Warming” isn’t what this is all about. This is all about world socialism, greater government control, and a UN power grab. I do not mind calling their bluff, but by calling for a tax you are playing right into their hands.

Well, as y’all know, I’m a graphically oriented guy. Here’s the averages that Ross is talking about. Fascinating plan by the way, Ross, cuts to the chase. Anyway, here’s the record:

As you can see, for most of the record the RSS record has been warming quite a bit more than the UAH record. The interesting thing, however, is that the distance between the two averages (green line, RSS average minus UAH average) peaked at the start of 2005 and has been steadily declining since then. RSS has been declining more than UAH. I didn’t expect that … I wonder what has changed?

w.

PS – The tax as at May 2007 would be $4.69, down from a high of $6.00 in April 2005 …

Such a tax would just mean increased politicization of the science surrounding temperature measurement and related adjustments. Ross says

all the revenues would be recycled into domestic income tax cuts to maintain fiscal neutrality

… but that’s just not going to happen. If politicians see a chance to garner more unearned revenue they’ll take it. If they see a chance to fund the next temperature sensing satellite with the instruments that sometimes fail on the warm side, they’ll take it. And if the current administration won’t do this kind of thing, then the next administration 4 years from now will. It’s a dark, dirty road you go down when you propose to give more money and power to governments to “solve” environmental problems.

I called your ingenious proposition “Solomon’s solution” for a reason: real mother will not allow her child being cut in half. AGW promoters will not desecrate their brain child, or, if you want, goose giving golden eggs.

Exploitation of AGW theory is too valuable to so many:

“As Aaron Wildavsky, professor of political science at Berkeley, has quipped, “global warming” is the mother of all environmental scares. Wildavsky’s view is worth quoting. “Warming (and warming alone), through its primary antidote of withdrawing carbon from production and consumption, is capable of realizing the environmentalist’s dream of an egalitarian society based on rejection of economic growth in favor of a smaller population’s eating lower on the food chain, consuming a lot less, and sharing a much lower level of resources much more equally.” In many ways Wildavsky’s observation does not go far enough. The point is that carbon dioxide is vitally central to industry, transportation, modern life, and life in general. It has been joked that carbon dioxide controls would permit us to inhale as much as we wish; only exhaling would be controlled. The remarkable centrality of carbon dioxide means that dealing with the threat of warming fits in with a great variety of preexisting agendas–some legitimate, some less so: energy efficiency, reduced dependence on Middle Eastern oil, dissatisfaction with industrial society (neopastoralism), international competition, governmental desires for enhanced revenues (carbon taxes), and bureaucratic desires for enhanced power.”

Also, diesel cars promoted in Europe as climate-change friendly emit only about 10% less CO2 than comparable gasoline cars, but emit black carbon particles which makes them more Earth-heating than gasoline ones.
Highly advertised switch of Europe from coal to Russian NG actually heats-up the climate: estimated went-off on Russian NG facilities is no less then 10%, and methane is 20+ times more powerful GHG than CO2.

The main drive of European AGW powerhouse is to subdue US and Australia to Kyoto-like scheme, not to reduce GHG emissions. That’s why they turn blind eye to Kyoto-bonded countries who increased CO2 emissions by 50%+ from 1990, such as Canada, Italy, Spain, Portugal, Ireland, Greece, and concentrate on US which maintains stable per capita CO2 emissions from 1990s.

Many industries (such as biofuels, nuclear power, wind and PV, etc.) jumped into AGW bandwagon in anticipation of artificial boost, and will benefit from carbon tax in any case, except if it will be your T3 tax. No one of them will risk massive investments if carbon tax competition edge will diminish if GW will stop or, Gore forbid, reverse.

But seriously, on economic side, I strongly believe that behavior-changing overtaxation distorts the market and at the end sometimes produces (according to law of un-intended consequences) diametrally opposed results. Classic example is over-taxation of transportation fuels in Europe, partial goal being to decrease adverse environmental and health effects of tail-pipe emissions. The market responded by switching to more fuel efficient but way more dirty diesel cars, and as a result European capitals are suffocating in diesel fumes and the toll in human life is whopping 300 000 people-years in premature death yearly. Pseudo Revenue-neutral feature of your proposed tax does not eliminate this drawback.

It’s all very entertaining, and it seems to be playing well to the house, but the tax as proposed would not be acceptable because of the unpredictable short term impacts of natural forcings.

The threat being implied by the proposal is that even if temperatures stabilise or fall over the next ten years, the movement of tax from consumption in general to carbon consumption specifically, will be hard to reverse.

Political realities are, though, that tax has to be accepted by the populace – the fuel blockades in the UK in 2000 in reaction to the “fuel price escalator” are an example of this. If AGW does turn out to be a horrible scientific error (which it won’t), or perhaps less unlikely, predictions move toward the lower end of the IPCC scenarios, then the price of carbon will fall whether the governments like it or not.

but the tax as proposed would not be acceptable because of the unpredictable short term impacts of natural forcings

We can remove those short term impacts by implementing a smoother with minimum roughness constraint.. Doh, that didn’t smooth the last point. Maybe prediction of future data using climate models would help?

Another impact would be a refocus of climate science on seasonal and decadal forecast. Governments would have been pretty unhappy to have written their budgets based on the El Nino forecast this winter only for it to tail away rapidly to a La Nina.

However, once the models had improved, the meteorologists would be making a fortune selling forecasts to the futures markets. Maybe not such a bad idea after all.

However, once the models had improved, the meteorologists would be making a fortune selling forecasts to the futures markets. Maybe not such a bad idea after all

The same can be said about the carbon market. There will be fortunes made in carbon futures markets. I suppose that economists have studied this but as the economy moves through the business cycle, capacity will be added and subtracted from manufacturing. Capacity reduction should allow a business to release carbon credits to the market. Carbon hedging would seem to be an advisable strategy for any business.

Willis, I also noticed that the RSS series is trailing down a bit faster than UAH since 2002.

For those who regard taxes as politically unacceptable, the same idea could be implemented as part of a tradable permits system. Issue permits to emitters, let them trade them freely and set a fine = T3 for emissions above the number of permits you hold. Then the market price for permits will be capped at T3, and the system will effectively turn out to be a carbon price with tradable exemptions. It’s called the ‘safety-valve’ price (or ‘hybrid’ permits) system.

#40 This is part of the logic. You want a financial reward for getting better climate forecasts. Not all modelers would be making a fortune, only those who set aside all pre-conceived ideas and came up with a model that gets accurate results. Just think, you could tell the big climate labs that their grants end as of December 31 and after that they would have to make money selling forecasts to investors. Within a few years, maybe Piers Corbyn would have the revenue stream that Hadley (formerly) had.

An interesting idea, but Im afraid there are too many flaws.
First, it is certainly possible for the troposphere to warm due to mechanisms other than GHG. After all, its been warming pretty steadily for the last 18,000 years (since the peak of the last ice age). Its entirely possible the world will be warmer than the IPCC predicts in 100 years even if they are completely wrong about the mechanism.
Second, who will be the keeper of the temperature measurements? Determining the average temperature for the troposphere is a non trivial exercise. There will undoubtedly be disputes over methodology, with enormous political pressure coming from all sides.
Finally, and most importantly, what if the troposphere warms materially (for whatever reason)? Must we really submit to higher taxes just because of that? I can assure you, if the troposphere cools voracious governments will simply create new taxes to fill the gap, but any tax windfall from warming will not see a commensurate, opposite response.http://tinyurl.com/22hy4u

#43
It is not clear that a model that is good for providing risk-reducing seasonal and decadal forecasts to a futures trader is good for assessing the risks of climate change to governments or to day-to-day business decisions.

On the other hand, under a mature carbon trading scheme (not the one we have yet), financiers will be well placed to assess the likely actions of governments in setting policies for issuing carbon permits, as they assess now the likely actions of central banks in setting interest rates. Good, well-proven, climate science will be of equal importance to such assessments.

Under T3, research organisations will still get the bulk of government research funding. But instead of the current situation where minor government departments have to squeeze cash out of the treasury to pay for climate research, under T3, the treasury will have a huge interest in the results, and even the bad scientists (but not Piers😉 ) will be carting away buckets of cash.

#44 Of course these arguments apply even more forcefully to surface metrics of AGW, and to policies triggered by them. I’m not worried about people scamming the MSU data. Much larger economic consequences are attached to the Consumer Price Index: cost-of-living adjustments to national pensions and welfare, thousands of labour contract escalator clauses, etc. National Stats Agencies have transparent procedures to make sure no one can be paid to fiddle the result. Not to say there isn’t a problem of an upward bias in the CPI (it’s well-known), but at least everyone knows how the index is made. NOAA releases the microwave data (or they could arrange to) and people know what the UAH and RSS formulas are, so it could all be independently verified. The contrast with the surface data is obvious, which is one reason I’d never tie a tax rate to the GISS or Hadley products.

The T3 tax isn’t bullet proof, in the sense that an increase might be triggered by natural causes, but a revenue-neutral switch from an income to fuel consumption tax at the rates I am proposing would have very small and possibly positive macroeconomic effects. Even if the tax ever went up to $30 or $40 per tonne, as long as every penny of revenue goes into cutting income taxes, the economic effects would not be huge. But to get to $40/tonne you’d need the temperature anomaly to rise to 2, and I just think that’s unlikely in the real world, as opposed to the GCM world. On the other hand, alarmists worry we’ll be there very soon, so they ought to be quite keen on this plan.

Definitely an ingenious idea in the right direction (as long as the informed citizens of the different countries would democratically accept the tax). However, the tropical troposphere can warm steadily for reasons different from the GHGs. More particularly, the UK Met-Office website on climate change myths (“myth” 3) asserts that the tropical troposphere would equally warm due to solar forcing (more than the surface).

Realistically though, I think we Europeans are well beyond this kind of debate. AGW is a socially and politically accepted Truth (not to speak about the need of government environmental regulation) and nobody would care to propose such novel ideas. The initiative would have to come from the USA and the rest of the Anglo-Saxon world.

#47 It would be hard for the met office to claim that the sun could produce the kind of warming trend in the tropical troposphere that the IPCC projects at http://ipcc-wg1.ucar.edu/wg1/Report/suppl/Ch10/Ch10_indiv-maps.html (Fig 10.7). Especially since Myths 2, 4 and 5 rule out a major role for the sun in current warming, and assert high confidence in the predictive powers of the GCM’s that attribute recent warming to GHG’s and project even more in the tropical troposphere.

#51
My understanding is that the point being made is that predictions about tropospheric warming are unrelated to whether the forcing is greenhouse gas or solar. ie. its a test for the GCM (or the satellite measurements) not a test for whether it is solar or GHG.

On the other hand, the cooling of the stratosphere relative to the troposphere is a unique prediction of the impact of additional GHGs, since increases in the sun would warm the stratosphere. Maybe T3 should be dependent on that.

Another impact would be a refocus of climate science on seasonal and decadal forecast. Governments would have been pretty unhappy to have written their budgets based on the El Nino forecast this winter only for it to tail away rapidly to a La Nina.

The proposal states that it will be revenue neutral, i.e. my understanding of it would be that the government would merely be the conduit of seeing that the taxes on CO2 producers were, more or less, getting back into the hands of those who would have to pay for it in the form of higher prices.

However, once the models had improved, the meteorologists would be making a fortune selling forecasts to the futures markets. Maybe not such a bad idea after all.

If it is market oriented one would predict that only those who could establish a proven better than average track record beyond that that could happen by chance would be the most successful. I doubt that the market speaks that loudly to their successes currently.

McKitrick’s proposal would be the best of those I have seen proposed and for the reasons he provides in the article. It assumes, of course, that we have sufficient knowledge to place a value on the “average” effects of CO2 as it relates to an “average” global temperature increase. There obviously could be some regions that benefit from temperature increases and some that may see adverse effects. I wonder how difficult this would be to prove in a court of law ‘€” and particularly so if a paper, of which McKitrick was a coauthor that dealt with the concept (misconception) of a global average temperature was allowed as evidence.

It must also assume that on average cooling is better, if the tax would cut-off with temperature lowering, and warming is worse or the assumption would be that the current conditions are somehow optimum, if the tax continued in both directions, which would be a rather convenient coincidence in my mind. I would favor McKitrick’s proposal if I thought the debate about the items assumed above were over and major government mitigating actions were imminent. I also like the individual thoughts, revelation of motivations and even ulterior motivations that McKitrick’s proposal brings to the AGW debate.

The IPCC certainly is attempting to sell AGW as a case of the current conditions being optimum and I think that is where their marketing evidence becomes so one-sided as to make it obviously biased. As evidence, I give you the graph excerpted from page 53 of the TS from the AR4 WG1 report where the diminishing cold area under the curve (moving) is minimized and the hot conditions emphasized:

Also an excerpt from the chapter on palaeoclimate AR4 WG1 on page 473 states that the reduction in temperature amplitude that von Storch is inferring as one attempts to reconstruct temperatures further from the calibration period is over rated and must be asymmetrical in that the methods may have underestimated cooler periods but not warmer ones (???) ‘€” with no further justifications for that comment:

It is very unlikely, however, that any bias would be as large as the factor of two suggested by von Storch et al. (2004) with regard to the reconstruction by Mann et al. (1998), as discussed by Burger and Cubash (2005) and Wahl et al. (2006)..

..In any case, this bias would act to damp the amplitude of reconstructed departures that are further from the calibration period mean, so that temperatures during cooler periods may have been colder than estimated by some reconstructions, while periods with comparable temperatures (e.g., possible portions of the period between AD 950 and 1150, Figure 6.10) would be largely unbiased. As only one reconstruction (Moberg et al., 2005) shows an early period that is noticeably warmer than the mean for the calibration period, the possibility of a bias does not affect the general conclusion about the relative warmth of the 20th century based on these data.

Much larger economic consequences are attached to the Consumer Price Index: cost-of-living adjustments to national pensions and welfare, thousands of labour contract escalator clauses, etc. National Stats Agencies have transparent procedures to make sure no one can be paid to fiddle the result.

But the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) fiddles with the Consumer Price Index all the time. To deal with supposed biases (sound familiar?) the index is constantly adjusted downard. There’s a lot of money and power associated to this index and those in power will manipulate it to their own ends. I don’t see why it would be different with a MSU temperature index in your T3 scenario. More info:

“BLS statisticians, since 1995, have been eliminating “biases” that they believe “cause the index to overstate inflation.” According to the Federal Reserve Bank of San Francisco website the elimination of these biases lowered inflation by more than half a percentage point by 1999.

So, under McKitrick’s proposal, it seems that we might cut emissions to zero immediately and yet still have our T3 tax increasing for decades, which would serve no useful purpose. And this makes me think that taxing emissions directly would be a much more efficient instrument in combating our problem than a tax on their effects.

You’ve completely misunderstood it. The T3 tax is applied directly to emissions, that’s what the phrase “assessed per tonne of CO2 emissions” means. Who do you think is paying the tax, the satellites? And how would a $4.70/tonne starting value “drive emissions to zero immediately”?

(In fact, on further thought it seems to me that the T3 tax might provide a perverse disincentive to carbon emissions cuts even where the “fingerprint” clearly indicates warming. A direct tax on emissions offers the polluter an either/choice: cut emissions or pay more. McKitrick’s tax, given the time-lag noted above, hits polluters with both increasing taxes in addition to whatever costs might be incurred in “going green”, perhaps to the point where the best solution might be to pay the tax and emit like crazy)

Further incoherent drivel. How on Earth would an increasing tax rate on emissions induce firms to “emit like crazy”? Demand curves slope down, not up. If the idea of a warming “commitment” is correct, firms planning investment in energy-intensive operations will factor the tax rate increases into their planning decisions today, unlike proposals that fix the price or the cap irrespective of future temperature change. The T3 tax fully addresses the time-lag, at least as much as it is possible within any policy framework.

The op-ed was not very complicated, but it obviously went way over your head. Judging by your sophomoric remark about “trivial methodological issues” against the hockey stick graph, it seems a lot goes over your head. And your jingoistic headline about “AGW Denier” raises the obvious challenge which you so conspicuously avoid. If you really believe the warming projections, and you want a tax directly on emissions, why don’t you support the T3 tax?

Like I said we can learn from the discussion that McKitrick’s proposal has provoked. I know there is a well thought out big city liberal POV out there that we have not seen yet at this blog. Anyone care to deliver it?

I think I’m mistaken on the cutting emissions “to zero” bit. But since the emissions are not perfectly synched to the troposheric warming and cooling, it seems to me you might still get a situation where emitting fewer tonnes still costs you more because warming has driving the tax rate up.

The disincentive comes in because you are paying the tax plus whatever it costs you to cut emissions. At a certain level, the cost of paying the tax might make the cost of cutting emissions unaffordable.

#64: “the cost of paying the tax might make the cost of cutting emissions unaffordable”

Yes, a tax is an added cost. The tax encourages firms to seek ways of reducing emissinos, so as to avoid the tax. This is how carbon/emissions taxes work. Didn’t Iggy propose one during the last election?

Hi,
I don’t think China will sign up to this any more than they would sign up to Kyoto. Wouldn’t they lose some of their competitive edge straight away? Even though the scheme would be tax neutral within a country, there would still be some initial price on C02 and that would increase the manufacturing cost to a company within China, increasing the price to the customer. They would do better staying out. Of course that applies to a Carbon market as well, and I can’t see them buying that idea either.

Besides, think of the fraud. I can see queues of Pepsi employees holding their breath till they get to the Coca Cola factory and then breathing out, or maybe the equivalent of fly-tipping; smuggling cannisters or even containers out of your factory and releasing C02 in areas where you aren’t monitored.
And heaven knows what it will do to the price of Dry-ice…

Apologies in advance, you do the sensible thing by lurking in admiration for months, and then come out with this drivel.

#64: There might be a situation in which the T3 rate goes up because the temperature has gone up, even though emissions went down the year previous. In that case emitting fewer tonnes at a higher tax rate might cost more than emitting more at a lower tax rate. But that is not the basis of the firm’s emission decision since the polluter doesn’t choose the tax rate. The tax rate cannot be affected by a firm’s emission decision (or lobbying activity) so it takes the rate as given for the purpose of choosing its emissions level. When choosing emissions levels the firm compares the total compliance costs of more or fewer emissions given the expected tax rate.

Compliance costs under an emissions tax = t*E + c(E0 – E), where t is the tax rate, E is the emissions level chosen by the polluter, E0 is the unregulated emissions level and c() is the abatement cost function. To minimize this expression with respect to choice of E, take the first derivative and set equal to zero, yielding the first order condition t = c’. Firms reduce emissions to the point where the marginal cost of further emission cuts (c’) just equals the tax rate (t). If the tax rate goes up, they reduce emissions, and vice versa. The only reason they would plan to increase emissions is if they expect the tax rate to fall, and the only reason for this expectation is if the tropical troposphere is expected to trend to cooling. Since the IPCC and all the smart people out there who have been to Al Gore’s Ashram say it will trend to warming, firms should all expect the tax rate to go up, and they will accordingly cut emissions and plan to cut them even more in the future. If when the future comes, the tax rate is lower than expected, they will adjust by increasing emissions. Etc. etc.

RE: #68 – I should think that given all the aerosols and dust being emitted by the PRC, a trend which will continue to worsen for the foreseeable future, the PRC would be gleeful about a T3 regime instead of a Kyoto one. That’s assuming one believes that aerosols and dust counteract warming. I even tend to beleive that.

68> Even though the scheme would be tax neutral within a country, there would still be some initial price on C02 and that would increase the manufacturing cost to a company within China, increasing the price to the customer. They would do better staying out.

If other taxes are reduced, then manufacturing cost would likely not increase, except for products that are very GHG intensive (which is what we want).

Nations that stay out (of a T3 tax agreement) could have a corresponding tariff applied to their products.

Steve has an interesting point in #70. If the troposphere cools and the tax rate decreases, you can bet someone will come out with a GCM projection showing that the cooling is due to aerosols or particulates of some sort. And that the CO2 emitted should be warming the troposphere instead, but is being frustrated as it was between 1950-1975. The argument will be that cuts in CO2 emissions should be enforced anyway, because when the aerosols (or whatever) precipitate out, the warming will suddenly accelerate — at some future time left ambiguous.

The whole thing is politics, in other words. It’s an admirable idea to base a tax on an objective determinent — on an observable. But GCMs are malleable if nothing else, and one can be made to project almost anything. The tax may rationalize at least part of the discussion, but the same political argument will merely move to another arena. That arena will be whether some cooling trend is due to a failure of prediction, or due to some adduced transient, and can we take the chance by cutting the tax.

In a sense, the T3 tax implicitly concedes the point that GCMs produce real predictions, because the tax rate is rationalized by reference to those predictions. I.e., whether the predictions are met, or not. Conceding that point legitimizes the entire AGW claim because it empowers GCMs with predictive credibility.

But GCMs aren’t falsifiable, as they stand. They don’t make hard-and-fast predictions because their inputs rest on qualitative judgments. Change one’s parameterizing opinion, change the prediction. There is endless grist for new contentions there, and given the passions that attend the debate, I don’t think a T3 tax will free us from any of the controversy. But it will legitimize climate unreason.

On the other hand, the T3 tax really is a put-up or shut-up challenge. If nothing else, it will force AGW proponents to put their claims on the line — one which they do not control. If they complain or refuse, a hypocrisy will be revealed. We already see a lot of very revealing complaints — from Peter Hearndon and bigcitylib, for example. Ross is to be congratulated for smoking out the irrationals.

Has it occurred to anyone else that the term “denialist” has all the unsavory derogation of “kafir!” by a muslim fanatic, or of “atheist!” by a Christian fundamentalist? In the brave new green world, “denialism” would be a crime — punishable by law or susceptible to mob action.

Ross, congrats on making an interesting and hopefully productive concrete suggestion for a global tax regime.

A few thoughts:

– Use taxes are regressive. To help the lower income strata adapt, any tax revenues should be distributed pro rata and not as tax credits.

– How does your scheme apply to fossil fuel producers?

– Will you incentivize sequestration and atmospheric CO2 removal projects by recognizing them as tradeable offsets against emissions? What other offets would you recognize?

– CO2 is just one piece of the problem. What about other GHGs, soot and land use changes? Shall we ignore those, for the time being?

– Your pricing ignores intergenerational/discount issues by treating raising taxes for temperature increases that are not caused by current CO2 emissions.

– Of course China isn’t going to agree to any any costs right now for a problem that they didn’t make a meaningful contribution to until recently. At least at the beginning, we’ll have to compensate/subsidize them and other developing nations if we wish them to forego free CO2 emissions. Will direct compensation be politically feasible, or will indirect compensation via assignment of emission rights be needed?

– You assume that all Western nations are equally affected by climate change and willing to agree to equal taxes.

– You ignore the costs that are being felt, both in Western nations and in the developing nations. Do we need public spending to protect any particular resources? Does anyone have a claim for climate change damages, or for funding to help to adapt to changes? Arguably the task for dealing with adaptation in the developing world is even more difficult than having the West agree to a carbon tax or trading scheme. Do these needs have any claim on the tax revenues?

– You assume away the likelihood of political favoritism and political pressure as the tax rises, and the likelihood that new revenues will fuel more government and pork barrel spending to benefit the most well-connected firms.

– Are there any “no regrets” policies you would support, like eliminating subsidies to fossil fuels and subsidies for coastal development?

– How about related policies to deal with adaptation to unavoidable changes – like heavy weather events, changed stream flows and droughts?

I’d prefer the government just lower the cap for CO2 emissions slowly over time, even if it is not the cause of global warming (and do this with all emissions/waste). Necessity is the mother of invention, and with Oil supposedly running out anyway, the free market will take care of it. I don’t like any type of VAT because people don’t see it directly. This is why I am against State Lottos. I prefer that people control the purse strings by feeling a tax directly in their wallet as an item on their pay stub.

#76 — We’re not running out of oil. For all practical purposes (i.e., until a more economical energy source comes on-line), we’ll never run out of oil. Oil will just permanently become a little more expensive than people would like. What we’re probably running out of is really, really cheap oil.

– Use taxes are regressive. To help the lower income strata adapt, any tax revenues should be distributed pro rata and not as tax credits.

Some studies have looked at lump-sum redistribution as a way of incorporating equity considerations, but in general the issue has been, how to offset the efficiency losses of a Ctax. The answer is by lowering other taxes with equal or greater distorting effects. This includes payroll taxes and some other factor income taxes.

– How does your scheme apply to fossil fuel producers?

It applies to fuel at the point it enters the market for eventual combustion. For producers their internal use would have to be estimated.

– Will you incentivize sequestration and atmospheric CO2 removal projects by recognizing them as tradeable offsets against emissions? What other offets would you recognize?

Personally I think these are unlikely to be cost-effective at $4.70 a tonne, and less so at $1.70 a tonne where the tax will be in 2025. If a firm can show that these things work and they are willing to pay for them instead of paying the tax, fine, but the onus has to be on the emitter, not the government, to prove the scheme.

– CO2 is just one piece of the problem. What about other GHGs, soot and land use changes? Shall we ignore those, for the time being?

I’d ignore them. Especially the land use issue–agricultural sinks, etc strike me as scams. CFC’s are already heavily controlled, methane sources are not well understood, and the other gases have very small roles.

– Your pricing ignores intergenerational/discount issues by treating raising taxes for temperature increases that are not caused by current CO2 emissions.

Yes, I have not derived a formal result in an intertemporal optimization problem. However, once you move into that setting you get lots of complications, like an intergenerational commitment problem, with later generations free-riding on abatement efforts of the current generation. T3 does include a discounting element, since investors look at the discounted present value of the expected tax when evaluating a project.

– Of course China isn’t going to agree to any any costs right now for a problem that they didn’t make a meaningful contribution to until recently. At least at the beginning, we’ll have to compensate/subsidize them and other developing nations if we wish them to forego free CO2 emissions. Will direct compensation be politically feasible, or will indirect compensation via assignment of emission rights be needed?

I don’t believe any country will buy credits from China or Russia in any meaningful quantity. The potential for fraud and abuse would be too great. Gresham’s Law would destroy any such market within hours.

– You assume that all Western nations are equally affected by climate change and willing to agree to equal taxes.

For the purpose of the column I assume that all countries apply the same carbon tax. Some countries like Canada could say they are net gainers from AGW so they aren’t going to abate. But in theory, a globally optimal outcome would require everyone to face a common price based on the perceived global marginal damages, not the private (or national) marginal damages.

– You ignore the costs that are being felt, both in Western nations and in the developing nations. Do we need public spending to protect any particular resources? Does anyone have a claim for climate change damages, or for funding to help to adapt to changes? Arguably the task for dealing with adaptation in the developing world is even more difficult than having the West agree to a carbon tax or trading scheme. Do these needs have any claim on the tax revenues?

It is a feature of the economic theory of emissions pricing that you should not build in compensation for damages with the externality price, since people then do not have an incentive to avoid unnecessary exposure to the injurym thereby manipulating the compensation rate. I have a short paper on compensation in global warming policy here.

– You assume away the likelihood of political favoritism and political pressure as the tax rises, and the likelihood that new revenues will fuel more government and pork barrel spending to benefit the most well-connected firms.

If the law specifies the formula for the tax rate this would minimize the political interference and the incentive to try and lobby for favours. I also assume all the revenues are used to reduce other taxes, but of course in reality it’s hard to guarantee that. I certainly don’t endorse this as a tool for increasing the overall tax burden.

– Are there any “no regrets” policies you would support, like eliminating subsidies to fossil fuels and subsidies for coastal development?

At this point the only “no regrets” policy I endorse is the T3 tax. But even still I prefer no policy at all, knowing how once a policy gets put into place it builds its own constituency that seeks to perpetuate it even when the original rationale is gone. As for eliminating subsidies, I don’t know what subsidies are in place at present, but except for the very narrow circumstances that satisfy the Samuelsonian conditions for public goods, I view subsidies as bad policy. They amount to taking tax money to pay people to use up inputs to generate outputs that were worth less than the inputs, thereby destroying wealth twice over.

– How about related policies to deal with adaptation to unavoidable changes – like heavy weather events, changed stream flows and droughts?

I think these localized changes are totally unpredictable and I wouldn’t spend money on them. Just when you finish drought-proofing a region because some modeler said precipitation would fall 50% under AGW, the rains will start and last 10 years. Nature has a wicked sense of humour. Leave it to private sector agents to buy insurance, weather derivatives and other hedging instruments already available to cope with outdoor contingencies.

#76: A cap works like a tax, but the problem is the price can bounce around a lot. There’s quite a bit of research in economics looking at when a cap is the right approach and when an emissions tax is better. It is based on minimizing the expected social costs of the inevitable mistake from setting the policy target at the wrong level. In the case of carbon dioxide emissions, the verdict is that it is better to set a price. Discussions include this and this and this (though the latter has more to do with the indirect distortion problem and the problem of cartel rents created in a cap and trade system). A cap and trade system is also much more regressive than a carbon tax, at least if it is done like the US SO2 cap and trade system, with grandfathered permits.

#72: Pat, the T3 tax is based on the observed temperature average, not the GCM forecast. The current generation of modelers can play endless games parameterizing their preferred outcomes and choosing among the infinite number of ways to rationalize N historical data points given N^k free parameters to adjust. But all those games will count for naught if you are being looked at by a firm planning a $10 billion refinery and your 5-year forecast track record is worse than some college kid with a PC and a simple trendless ARMA model. There’s a reason large-scale Keynesian modeling went out of favour, and it had a lot to do with the fact that there was serious money at stake on the forecasts.

#80: I do not advocate a cap and trade system, just a cap. The government should do what it is supposed to do: govern. A tax produces revenue for the government, a cap does not necessarily. I am for smaller government, not larger government.

My apologies, but I live in Australia, which exports more coal than any other country. If one wishes to reduce atmospheric CO2, among other methods, one has to burn less coal. A cap or a tax on coal are just not going to happen, because the standard of living here will drop (population 20 million). Emissions trading, carbon credits and so on will merely create artificial schemes that will ultimately allow the same amount of coal to the be exported and burned, though the process might take a little longer. The dominant force is to maximise corporate return on investment in the coal trade. My employer company used to own several coal mines, so this is an insider view.

China mines about 7.5 times the tonnes of coal that Australia does each year and it is an importer from us. If Australia reduces its domestic coal consumption it will have little effect on the world, but if it stops mining and export to China it can have an effect. The effect will be that China will buy lower quality coal from another country in replacement. For reasons that follow from this quick analysis, we have not signed the Kyoto agreement. There is more harm to personal comfort from Kyoto than from from CO2 increases.

Silly trading schemes are starting. In the Northern Territory, a fossil fuel refining company had started trading carbon credits with an Aborigine community. The Aborigies promise to light small fires annually in the bush, rather than large ones, so less CO2 goes into the air. The refining company is paying the Aborigines millions to buy this carbon saving.

But, the saving is completely illusory. In terms of say a century, the only way that fire management will significantly affect carbon emissions is by an increse in the vegetative carbon sink. That is, large trees will have to grow where there are now small trees. But there is no forestry industry in the NT because whiteants destroy trees before harvest age. And don’t whiteants also emit methane?

I forgot to add for Ross, an old definition that you might have seen before:

An economist is a person who, on seeing something working well in practice, wonders how it would work in theory.

Back to China and incentive schemes and perhaps urban myths. Under Mao, it was decided that there were too many rats, so each person was required to present a number of rat tails each week to a repository, where they would be paid. It took a short time for entrepreneurs to set up rat farms to produce huge numbers of rat tails. Can you not imagine poor tropical countries lighting huge fires to warm their skies?

Under your sceme, Ross, how would you get China to pay its dues? Inscrutably, it would say that the temperature anomalies were produced by American satellites and the whole world, even Americans themselves, know they do not give the right answer. Have another look at “Dr Strangelove” for the Russian reaction. End of story.

My apologies, but I live in Australia, which exports more coal than any other country.

Which brings up another question for Ross. Where exactly does the tax get levied and who can use it as an offset to other taxes? One would presume it would be at the place the actual burning takes place for both, but I’m sure there will be problems, especially where there are border towns or say with ships burning fuel. Can such frictional issues be ignored? If not there may have to be burdensome paperwork involved. (I know, what other sort of paperwork is there?)

Which brings up another question for Ross. Where exactly does the tax get levied and who can use it as an offset to other taxes? One would presume it would be at the place the actual burning takes place for both,

And another question would be what would happen if the taxable ommodity was used for another purpose? Petroleum is used to make artificial fibers, plastics, artificial rubber etc. These are effectively carbon sinks since they do not decompose.

A number of the above comments have to do with the legal specifics of how to implement a carbon tax (or any other excise tax) which I think I will pass on here, but interested readers could look at McKitrick, Ross (1997). “Double-Dividend Environmental Taxation and Canadian Carbon Emissions Control” Canadian Public Policy December 1997, pp. 417-434 (sorry no e-copy available) or any of the zillions of papers published by economists over the years.

More thoughts, mostly borrowed from the Ottawa Citizen’s David Reevely (with links to his origonal post):

If you are concerned about the lag time of temperature to CO2 emissions, I am sure that could easily be factor into the tax equation ‘€” assuming that you have great faith in the modelers to accomplish that task. Do you?

Given that tax occurs after we have capitulated to the CO2 to temperature correlation and that we know that temperature increases from the present are bad, accounting for the time lag would be a mere formality. Would not it?

The T3 proposal should not be judged on its apparent absolute perfection / imperfection, but rather in relation to alternative proposals. It is true that a national tax cannot force China or any other country to “pay it’s fair share” of any hypothetical environmental damage. It’s also true that there is no scheme for “forcing” the Chinese to reduce emissions […other than possibly inserting the US Marine Corps or implementing a US Navy blockade of petroleum shipments to China…read von Clausewitz]. Even if China agreed to be bound by a future treaty regarding CO2 emissions, its compliance would be voluntary – that’s what it means to be sovereign. As with women, there’s a sovereign’s perogative to be fickle and change one’s mind. If you believe that the US should not go around flexing its muscles, telling other sovereign nations how to act, this point should be a no-brainer for you. Diplomacy is not easy, but it’s the only method available to ask the Chinese to participate.

Perhaps some would be happy with a scheme in which the United Nations is granted the power to assess and collect taxes directly. That would be “fair” b/c it would apply to everybody. Of course, the UN would then have to have an armed enforcement mechanism to collect taxes in countries that objected. An international scheme would be the worst and scariest of all enforcement schemes. Ross, you’re on the right track with a nationally based scheme.

Newt Gingrich recented stated during debate with John Kerry that he feared “the fix was in for cap and trade.” T3 needs to be compared with the poison we are likely going to be asked to swallow under the current political climate.

The gamble Ross proposes negates the China issue. If warming is negligible, and the tax negligible, who cares if the Chinese don’t pay it ? If warming is alarmingly significant, we should do what we can to reduce emissions now and send the Marines into China later… The tax would seem to be complementary to either China policy.

#81 — Ross, I wasn’t criticizing your T3 tax. I think it’s an excellent idea. In #72, I was mainly pointing out that even if the tropospheric temperature goes down, AGW proponents will claim that it is doing so *despite* the rise in CO2 levels. They’ll go on to claim that the temperature rise will be accelerated after loss of the down-perturbation (whatever is conveniently imputed). So, the political argument won’t change at all, no matter that your tax is very rational. AGW’ers will argue that the tax, any carbon tax, should remain high no matter the objective determinent, because they’ll always have a GCM projection that will predict a future temperature catastrophe.

The other point, that the T3 tax implictly validates GCMs is given by point 2,ff in your article: “Second, climate models predict that, if greenhouse gases are driving climate change, there will be a unique fingerprint in the form of a strong warming trend in the tropical troposphere, the region of the atmosphere up to 15 kilometres in altitude, over the tropics, from 20′ North to 20′ South. The Intergovernmental Panel on Climate Change (IPCC) states that this will be an early and strong signal of anthropogenic warming. Climate changes due to solar variability or other natural factors will not yield this pattern: only sustained greenhouse warming will do it.”

You go on and write, “the T3 tax … rate is set equal to 20 times the three-year moving average of the RSS and UAH estimates of the mean tropical tropospheric temperature anomaly…”

I.e., the tax itself is gounded in the predictions of a supposedly unambiguous CO2 signal as determined by GCMs. Being so cedes the point of GCM accuracy.

It is not my responsibility to fill in neglected aspects of McKitrick’s tax. If he were in baking class, his teacher would be marking his T3 tax project half done. But if he is willing to work out the basic details, I’m not sure the T3 tax would be such a bad idea. The real resistance to it will come from the political Right (check out the comments at the Western Standard Blog, for example). Conservative “Intellectuals” have trained their knuckle draggers to see any tax as EVIL, and I’m afraid they will not be conveniently untrained in response to proposal’s like Ross’.

It isn’t my job to fill in the lacuna’s in McKitrick’s tax. If he were in baking class, his teacher
would tell him he was but half finished. However, if Ross wants to work out some of the basic details of his proposal, I might be willing to endorse it.

However, the real resistance to him will come from the political Right (check out comments on The Shotgun Blog, for example). Conservative intellectuals have trained their knuckle draggers to see all TAX as commie evil. They will not be untrained at the whim of Mr. McKitrick.

#91: Pat, this may be semantics, but I don’t endorse the forecast, I merely observe that this is what all the forecasts say, so if the forecasters believe their own forecasts, they will be endorsing a rapidly rising carbon tax. If they object that the T3 tax won’t be high enough, they are contradicting their own forecast. For me, as you know, I think the forecasts are wrong and the T3 tax will go down to zero over the next 10-20 years. Which, under the circumstances, would be the right outcome.
#92: there’s a huge literature on how to implement carbon taxes, so for the purpose of a short op-ed I didn’t need to work out all the specifics. We already implement excise taxes on fuels, the CTax is just a rule for setting the rates, and the T3 tax is a variant on that.

Ross, I think your idea is brilliant because it places the burden of proof in the right place. But you must agree that it has impracticalities.

Supposing temperatures rise for 10 years, payments are collected, then the temperature falls back to base line in the next 10 years, with reduced payments.

What is the best way to spend this collected money?

Almost any activity I can contemplate will merely produce another method of CO2 emission. For your theory to work purely, the collected funds should not add to the CO2 burden, because that muddies the waters of interpretation and leads to argument and non-compliance.

The only effective use that comes to mind is the construction of more nuclear power generators, whether for electricity or for desalination or for hydrogen production. As my employee company also operated one of the World’s major uranium mines (Ranger), I had to keep current on nuclear matters as well as fossil fuel. (My latter function was heading our Government Relations).

You would then have a double-barrelled package to sell. You would have to achieve adoption of your revenue plan and you would have to sell a use for the funds – a use that is unpopular among the very same people as are calling for a reduction in fossil fuel use because of alleged AGW.

The philosophy of the world is dividing again between the Malthusians and the practicalists. The Luddites and the progressives. So far the latter has come out tops each time, but society seems to find a way to do that without the massive intervention of monetary controls. (I have not seen a practical CO2 emissions scheme either).

Historical study loosely indicates that you need a third barrell. Teachers have to be trained to tell the truth about science. To me, that is the top imperative. Now work out an incentives scheme for good teachers and a penalty for bad ones and the Nobel Prize might await you.

#93: It is much more difficult to get rid of a tax than it is to pass a tax, so one should be highly skeptical of any tax proposal. Most real Conservatives that I know have a view of taxation that is not entirely different from our founding fathers. If anything, we should get back to it, not untrain ourselves from it.

The tax revenues are to be returned in the form of tax reductions and thus there is no collected money to spend. This is a major part of the brilliance of the idea and very practical in light of the know tendencies of governments once they have access to a pile of money.

The major intent of the proposal as I see it is the put up or shut up challenge to the climate modelers and the timing issues, as modeled, would be part of that challenge.

I’m coming late to this discussion and don’t know whether it’s still being monitored.
The proposed tax is proportional to the temperature anomaly in the upper troposphere. My question is, wouldn’t the tax rate be more closely coupled to CO2-induced warming if it were proportional to the *difference* between the tropospheric anomaly and the surface temperature anomaly (using the same baseline time period)? As I understand it, the AGW fingerprint is, faster warming of the troposphere than of the surface; if AGW is occuring, then at any given time from the baseline, the troposphere will have warmed more. If the difference between the two is used, surface warming from other causes — say, natural variability — would not increase the overall tax, since the resulting tropospheric warming would be slower and smaller than the surface warming.